Employee or Contractor? A New Perspective

Published April 6, 2010

The recent Ontario court decision of McKee v Reids Heritage Homes Ltd (RHH) has created yet another installment of the already confusing definition between who is an employee and who is a contractor.

Specifically, this case distinguished between an employee and a contractor and what significance the true nature of the relationship between the two terms can have on the status of the worker.  Further, this case confirmed that a sub-category of a contractor called a dependent contractor exists but can only be looked at if the worker is ruled to be a contractor, not an employee.

McKee began her work as a salesperson for RHH in 1987. She was contracted and she received payment on every home she sold.  McKee used this money and pay the employees of her own company.  In 2005, when presented with a new six-month contract from RHH which required McKee to be an employee of RHH, McKee declined to sign. Her relationship with RHH deteriorated and she was soon after terminated without notice.  McKee sued for wrongful dismissal and she was awarded eighteen months pay in lieu of her termination.  The trial judge in the decision stated that McKee was a “most integral part of the defendant’s business.”  The trial judge ruled that McKee was an employee and therefore owed eighteen months notice of termination.

At appeal, RHH argued that McKee was a dependent contractor, a sub-category of a contractor.  The Ontario Court of Appeal agreed that this category does exist and defined it as “those non-work relationships that exhibit a certain economic dependency, which may be demonstrated by complete or near-complete exclusivity”.  The appeal judge determined that courts must investigate whether the worker is an employee or contractor.  In order to begin this analysis, the following must be considered:

1. Exclusivity of service (McKee worked exclusively for RHH)
2. Control over work (McKee was told where she could sell, what promotional methods she was to use, and where to set price points for homes)
3. Ownership of tools (RHH supplied McKee with stationery and forms)
4. Risk of profit or loss (There was no evidence that McKee risked any significant capital in her sales operation)
5. Whether the activity of the worker is part of the company’s business organization (McKee was a crucial element of RHH’s business organization)

Previously, due to McKee having her own corporation in which she employed workers, the court would have determined that she was a contractor.  Not anymore.  Now, the court will go through a test which will look at exclusivity, and only then will the court determine a worker's status as an employee or a contractor.   Only when a worker is defined as a contractor can the court move to the second analysis to determine whether the contractor is a dependent or independent.  At both the original trial and at the appeal, McKee was ruled to be an employee.  It was therefore not necessary for the court to determine whether or not she was a dependent or an independent contractor.

Regardless of how well an organization drafts a contract with a worker, courts use 'substance' and 'form' as the defining parts of a working relationship.  In other words, the court will look at the relationship and the exclusivity of the organization and the worker.  In order for an organization to ensure that a worker is a contractor, they must evaluate the relationship on a regular basis.  For example - don't give the contractor a business card with the company name on it. Also - encourage the contractor to branch out for other sources of income.  It's all about substance, not the written agreement.

Further, when contracting a contractor, make sure that the working agreement is updated often and is compliant with provincial employment standards.  McKee’s next agreement after her initial 1987 agreement was offered to her in 2005.  In 1987, McKee agreed to an agreement in which she would receive 30 days notice of termination.  Thirty days is below the legal standards for a worker of 18 years.  The trial judge determined that the 1987 agreement between RHH and McKee breached the Employment Standards Act by only offering a 30-day notice of termination, and the contract was therefore deemed invalid.

The courts are proving that the signature on an agreement will no longer be the only determination for the nature of a working relationship.  This case teaches that substance and the true nature of the relationship will decide a worker's status as an employee or as a contractor. This is an area of significant potential liability for most organizations, especially organizations in the non-profit sector that rely upon a mix of employees and contractors to get the job done.

Originally published: Centre for Sport and Law Newsletter Vol. 6(2)